Wal-Mart: Stagnant since 1999

[troycochrane]

Joe,
My graph doesn't show the increase for 2008 solely for the reason that I don't have that data. I did this paper last year and 2007 was the latest data available. It's a fair bit of work constructing this WRDS500, and I wasn't prepared to do it to add the 2008 data. Eventually, I will.

You are quite right about the tensions between debt and equity, but this tension is precisely because both constitute a claim on a corporation's earnings. Equity holders must take debt into account when assessing the value of the corporation. However, they do not see the earnings that will go to debt as not part of the expected earnings of the corporation. Quite the contrary, they merely see it as earnings that will not come to them. This measure of market capitalisation is an attempt to capture more of the claims on a corporation's earnings. Imagine what would happen to the equity value of a corporation that drastically increased its outstanding long-term debt? This is an increase in another claim on earnings, reducing the expectations for the equity holders. This will cause the equity value to decline, even though the actual expected earnings of the corporation have not changed. Retained earnings, on the other hand, could have been distributed as dividends or used to retire debt, and both would have increased the equity value of the firm. This measure is often referred to as 'enterprise value.' I retain the term 'market capitalisation' in order to keep the focus on capital and capitalisation (the same formula is at work for both debt and equity holders; also debt could serve as a proxy for the valuation of private equity firms).

For a bit on this in N&B, check out Nitzan, Differential Accumulation: Toward a New Political Economy of Capital, pp. 191-195.

If this hasn't made sense, I can try to clarify some more.

Just for the record, if you look just at equity, Wal-Mart's post 1999 decline is even more drastic.

[joefrancis]

Troy,

Thanks for the clarification. It makes sense now.

One thing: Sandy's recent post made me think about the effects of dollar devaluation on Wal-Mart. You're probably way ahead of me on this one, but I imagine that a weaker dollar must make all that imported junk a lot more expensive. Do you think this might have contributed to Wal-Mart's recent differential de-accumulation?

I suppose that much would depend on the extent to which Wal-Mart could maintain its profit margins by increasing final sale prices...

J

[troycochrane]

Joe,
Isn't the Chinese yuan pegged to the dollar? Imports from other places are likely more expensive, but would this have much of a differential impact as others would also be impacted? I'm thinking not.

-t-

[josephbaines]

I'm one and half years late in contributing to this discussion... anyhow, better late than never I guess!

I got some market value and price/earnings data on various sectors of the food chain from Thomson Datastream yesterday. This allowed me to calculate the profit shares of all the listed corporations in the world included in these sectors:

Capture.PNG (20.97 KiB) Viewed 6016 times

It seems that the stagnation experienced by Wal-Mart since 1999/2000 is in some sense illustrative of wider sectoral changes. As you can see from the graph the profit shares of the listed corporations situated at the end of the food supply chain have declined greatly since the turn of the millennium. This opens a broader research question: what transformations in the global political economy of food have stymied the differential accumulation and profitability of supermarkets/wholesalers?

[joefrancis]

Hi Joe,

It's never too late to contribute!

I'm replying partly because Jonathan got us confused and wrote to me about your post, telling me to look at the difference between raw food and retail food prices. Coincidentally, I'm was doing this anyway because of my research on Argentina (a major raw food exporter). Below is a figure that compares Troy's original series on Wal-Mart versus S&P500, comparing it with the ratio between US farm wholesale prices and US food retail prices. It suggests to me that the rise of Wal-Mart et al was due to a squeeze placed on the world's farmers, whereas Wal-Mart's relative stagnation since 1999 has been due to that squeeze reaching some kind of limit. It would be interesting to compare the price ratio series with the Datastream series on food processors and retailers' share of global corporate profits.

Joe

[josephbaines]

Very interesting stuff Joe!

Yeah, I’ll be going back to datastream in a few days time and I’ll get data on the profit shares of US-listed food processors and food retailers. I figured that it would be more appropriate given the fact that the prices indexes relate to the U.S. food market.

Anyhow, your thesis that Wal-Mart et al.’s squeezing of the farming sector has reached some kind of limit seems to be corroborated by an index that tracks the “farm-share of the US food dollar”. It was set up in the 1950s after the US congress passed an act to measure the costs of marketing agricultural products in their various forms. In rough terms it quantifies how many cents in the average dollar spent on food goes to the farmer and how many cents goes to post-farming processes in the supply chain. The below graph shows how the ratio has changed over the last fifty years:

farm-share 1952-2008.PNG (20.3 KiB) Viewed 5992 times

One issue with the data is that the way in which the US food dollar is calculated changed and the new index only goes back to 1993. As such the drop in the farm-share of the US food dollar in the early 1990s is probably a bit exaggerated by the graph. However, if we just focus on the new index we can see again that the squeezing of farmers reached some kind of limit at the turn of the millennium:

farm-share 1993-2008.PNG (10.02 KiB) Viewed 5992 times

Finally, all of this seems to cohere with my finding that the dominant food traders benefited most in the last ten years, particularly at the points of acute agflation (agricultural commodity price inflation). This is presented in the first graph in my post on the new global food crisis - viewtopic.php?f=12&t=279. The food traders that I analyzed - Archer Daniels Midland, Bunge and Cargill – dominate the processing of various foodstuffs. It seems that they’re progressively more able to pass on the increasing cost of raw agricultural goods onto those at the end of the food chain, while exacting a nice mark-up to boot. This is all very exciting because it shows as Nitzan and Bichler theorize, that inflation is the outcome of redistributive struggles fought between various capitalist entities.

All the best,

Joseph

[joefrancis]

Hi Joseph,

I missed your previous post, but will check it out properly, as it looks very interesting. Incidentally, I made a mistake on the figure I posted above: it should read 'US food prices/US farm prices'.

Joe

[josephbaines]

Hi again,

I've been thinking a bit more about the final food price/wholesale food price ratio you use Joe. I'm not sure whether it captures the degree to which the world's farmers are being squeezed by supermarkets. This is because the wholesale price is the price at which the supermarket gets food from its suppliers and there's a lot happening 'upstream' in the food supply chain before the food reaches the wholesaler.

The below graph doesn't really capture how much farmers are being squeezed either (for this I reckon the farm share of the US food dollar is pretty illuminating). However, I do think the graph does give us a good idea about how much food processors and food manufacturers are being squeezed by supermarkets and wholesalers. The thick line presents the changing profit share that supermarkets and wholesalers have in the global food sector. The thin line presents the changing price of final consumer foods relative to the price of food at the intermediate stage of processing.

Capture.PNG (23.88 KiB) Viewed 5936 times

As you can see the price ratio of final foods to intermediate foods is quite strongly correlated with the profit shares of supermarkets. This again seems to point to the fact that the differential accumulation of corporations involved in the food supply chain takes place in the context of differential inflation.

Best,

Joseph

[troycochrane]

That's amazing Joe. It's interesting that 1999 again appears to be an inflection year when the squeeze by supermarkets reversed. I would hesitate to claim this as the obvious cause for Wal-Mart's decline as it was, to my knowledge, barely in the food sector at that time. However, it might point to broader trends about the redistribution of power among wholesalers and final product retailers. This would be contrary to prevailing wisdom which only seemed to recognize the redistribution in favour of Wal-Mart after this period. I recall reading some Fortune articles about how Wal-Mart was able to exert pressure on corporations as seemingly powerful as Pepsi and Gilette, removing their products for their shelves if they did not earn favourable terms.

I wonder if this shift in 1999 was not necessarily because the intermediary players directly redistributed away from the consumer retailers, but because they further downloaded the squeeze. For example, perhaps Wal-Mart squeezed Pepsi, who squeezed the high fructose corn syrup manufacturers, who then squeezed the corn sellers, who finally squeezed the farmers. This would then appears as a relative redistribution in favour of the intermediaries against the consumer retailers, with the qualitative gain coming at the expense of the farmers.

[josephbaines]

Hi Troy,

Yes, I think your interpretation that the price squeeze was downloaded onto farmers would fit in with Nitzan and Bichler's claim that the differential struggles between dominant firms and the overall sabotage of the rest of society (in this case rural society in particular) are two sides of the same coin. However, at least in the US context it seems that the degree to which farmers are being squeezed has stabilized. This can be seen in the sideways movement of the farm-share of the US food dollar over the last decade as depicted in one of my above graphs.

Thanks for raising my attention to the fact that Wal-Mart was not always involved in the food sector. I've done a little homework and it seems that Wal-Mart started selling groceries in 1988. I'm going to have to look at SEC 10-K filings to see how the size of it's food division has developed through time.

I got some market cap data on Carrefour, Kroger, Tesco along with Wal-Mart. I chose to look at these four firms as they have consistently been at the very top in terms of supermarket sales for the last two decades. Carrefour is listed as a French firm, Tesco a UK firm and Kroger like Wal-Mart is headquarted in the US. I divided their annual market caps by the annual market value of the firms listed in the S&P 500 (I'll compile my own WRDS 500 index when I've time). The resulting data is presented logarithmically so as to show each firm's differential accumulation.

Food Retailers' Differential Accumulation.JPG (35.39 KiB) Viewed 5203 times

We can see that the differential accumulation of Carrefour, Kroger and Wal-Mart all peaked at the turn of the millenium just as the relative price of finished consumer foods climaxed and the farm-share of the US food dollar bottomed out. Tesco however does not fit the overall pattern. In terms of power it remained stagnant for much of the 1990s and then around 1998 it begins to differentially accumulate. What's more, the fall in the relative price of finished consumer foods does not stem the growth in it's power at all.

Why is this? Again, detailed analysis of financial statements has to be carried out. However, my provisional answer lies in the fact that Tesco developed it's own range of food product lines in the 2000s in a big way. Put simply, rather than just stocking established food manufacturers' products, Tesco itself began to assume control over the production of a vast range of foods on its shelves. While other supermarkets did this as well, Tesco took it to another level. According to one estimate, by 2005 Tesco's own brands such as "Tesco Finest" and "Tesco Value" (a favourite of mine as an undergrad student) accounted for 50% of its total food sales. This enabled it to differentially accumulate even when the price of intermediate foods were increasing relative to final consumer goods.